China’s Third Plenum Endorses the “Decisive” Role of the Market — Unfortunately for China

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Salvatore Babones

Salvatore Babones

By Salvatore Babones, co-author of The future of development: A radical manifesto

The Third Plenary Meeting of the 18th Central Committee of the Communist Party of China (the ‘Third Plenum’) took place November 9-13 in the Great Hall of the People in Beijing. The Central Committee of the CPC holds plenary meetings once every year or so to debate and announce new policies. China is currently ruled by the 18th incarnation of the CPC Central Committee (each incarnation lasts about five years). The third plenary meeting of each Central Committee is traditionally the venue for announcing major policy changes. The just-passed Third Plenum did not disappoint.

The sweeping reform announced at the conclusion of the Third Plenum consisted of changing one word in all the hot air of CPC so-called socialist rhetoric: henceforth the role of the market in economic decision-making will be ‘decisive’. As recently as October 7 of this year the role of the market was officially ‘basic’, as noted by Bloomberg. What is the difference between ‘basic’ and ‘decisive’? At a minimum it means further currency market liberalization and allowing the creation of privately owned banks. At a maximum it means much, much more.

The central government in Beijing has signaled that it wants to rein in profligate spending by local governments across the country. It has directed state-owned banks to reduce lending for new construction projects and has shelved plans for subway construction in many major cities. The new watchword is profitability. If a major infrastructure project can’t prove that it will turn a profit, the central government wants to see it closed down. All of this has been done under the banner of working toward maintaining ‘sustainable’ growth.

Of course, in China ‘sustainable’ is taken to mean 7.5% annual growth instead of the double-digit growth of the last twenty years. I predicted this slowdown in a September 2011 article in Foreign Affairs magazine and reiterated it in a 2012 follow-up article. Back in 2011 — just two years ago — the official IMF long-term growth forecast for China was 10.5%. Now it’s 7%. My own prediction from 2011 was that China’s growth would slow to normal middle-income country levels of 3% or 4% by 2020. Now the even the economic pundits seem to agree that the Chinese economy may not grow forever.

Making the market ‘decisive’ means that the Chinese government has decided to place profits before people — and even before that previously invincible talisman, economic growth. Faced with its first slowdown in twenty years, it has decided to maintain profits growth even if that means accepting a slower growth rate for the economy as a whole and job losses for ordinary people. No more extraordinary over-investment in infrastructure and housing, no more low-ball pricing of public goods to keep the pressure on private companies. The CPC has decided to let the market decide.

The smart money in China is increasingly investing abroad, even in recession-plagued California housing market, rather than in China. Foreign exchange liberalization will only accelerate this trend toward capital flight. Meanwhile China itself has become the main engine of profits growth for many western companies. All this is in line with government plans to transform China into a normal economy. Normal middle-income countries like Brazil, Mexico, and Russia are characterized by low government investment, high capital flight, and uneven economic growth. As China turns its economic decision-making over to the market, it is set to join this undistinguished club.

The future of development: A radical manifesto by Gustavo Esteva, Salvatore Babones and Philipp Babcicky is published by Policy Press at £17.99. It explains the origins of development and underdevelopment and offers a new vision for development, demystifying the statistics that international organizations use to measure development and introducing the alternative concept of buen vivir: the state of living well. Order on the Policy Press website at 20% discount

4 Responses to “China’s Third Plenum Endorses the “Decisive” Role of the Market — Unfortunately for China”


  1. 1 Salvatore Babones November 27, 2013 at 1:44 pm

    Two years ago I correctly predicted that Chinese growth would soon slow to more ordinary levels:
    http://www.foreignaffairs.com/articles/68207/salvatore-babones/the-middling-kingdom

    This was at a time when the IMF’s long-term growth forecast for China was 10.5% per annum. Contrary to all the punditry I’ve seen in the last few weeks, I think the Third Plenum program does little to protect a “sustainable” 7% growth rate. I view it instead as a program to justify the government’s decision not to make the investments necessary to sustain 10% (or even 7%) growth. Thoughts?

    Salvatore

  2. 2 Aija November 28, 2013 at 12:30 pm

    Interesting commentary on the Chinese interpretation of the “decisive” role of the market. I am even more surprised by their use of the word “sustainable” – they seem to use it to describe growth trajectory that simply is not as steep as before, though there is no reason to believe that a double digit growth figure has something inherently unsustainable in it. What I think really is unsustainable in China – is growth and production at the expense of environment, to me the level of smog in Beijing that prevents people from seeing the sun is a clear indicator that something is unsustainable and wrong.

  3. 3 Realonomist December 12, 2013 at 8:05 pm

    Placing profits before people does not only leave a growing number of people without jobs and lower incomes, but also creates a climate of political instability. If China actually wants to become an economy for the people, it needs to avoid what other “normal economies” have set an example in: growing profits and concentrating wealth in the hands of a few. The Third Plenum reveals once again that China has not become tired of following Western ideology, increasingly leaving the people’s fortune to the market.


  1. 1 How Weak Is China? Trackback on March 31, 2016 at 1:35 pm

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